Bulletproof Spending and Savings: Never budget again. Build wealth automatically.

I’ve been using a personal finance system for years now that allows me to know exactly how much I spend (and on what), pay all of my bills on time with zero effort, save and invest a large portion of my income. All of this takes me less than 15 minutes a week to manage on my smartphone. It’s both simple and powerful, and can be set up in less than an hour or two by anyone.

Financial expert Ramit Sethi was the inspiration for this system.

Step One – Grab a pen

On the back of a napkin, or on a spreadsheet, add up how much you spend each month on fixed expenses, things that are predictable and must be paid, and discretionary expenses, things that can vary a lot and can be delayed or changed when needed. Ignore expenses that come straight out of your paycheck like income taxes and health insurance, and don’t count any investing like 401k or IRA contributions.

Exact numbers aren’t needed. Overestimate your expenses since you’ll probably forget a few things, and it’s better to guess too high than too low. Take a maximum of 15 minutes to do this right now. Look at your online bank and credit card statements, especially year-end summaries, to quickly get an accurate estimate of your spending over the past year (including seasonal spending like winter holiday shopping and summer vacations.)

A single person who rents in a big city might have a budget like this:

Sample budget for single city person

Step Two – Take 20 minutes to set up free Capital One 360 checking and savings accounts

Do this even if you’re not ready to start the system yet. It’s free, you don’t have to deposit anything until you’re ready, and will only take a few minutes. Doing this now will make you more likely to complete the system later.

From this link, create a 360 Checking account. Pro tip: deposit $250 from your non-Capital One bank account if you wanna collect the $25 bonus. Link your other checking account either way so that it’s ready to go when you need it.

Capital One 360 Checking account Apply Now

Next, create one 360 Savings account for each of the ‘Discretionary’ categories sketched out in your budget that. If there are some categories that you don’t care about tracking individually, lump them back in with your Fixed list. I keep a separate Travel account, one for Household/Hobby items, and a few others. Limit yourself to 3 – 5 categories for simplicity. Make sure to give a nickname to each account to describe it (e.g.: ‘Travel’.)

Make sure to also set up discretionary accounts for short-term savings goals such as a future Wedding, New Car, or House Downpayment, for things you expect to purchase within the next 1 – 2 years. (Longer-term savings goals like Retirement will be handled separately.)

Finally, create one more 360 Savings account and label it ‘Short term Savings’. This will be where all of your income above your monthly spending (Fixed + Discretionary) will go. For example, if your take-home pay is $4,000 per month, and your expenses are $3,000, that extra $1,000 will be put into ‘Short term Savings’ for you to invest later.

To protect yourself from accidentally overdrafting your Checking account, click your Checking account, then click ‘Account Services & Settings’ and ‘Overdraft Settings’. Choose ‘Free Savings Transfer’ and choose your ‘Short term Savings’ account. This will allow Capital One to automatically pull money from your Short-term Savings account into your Checking if don’t have enough to pay your bills. If this should happen, you need to ‘refund’ yourself by moving money back into your Short-term Savings account from either your Checking or discretionary Savings account to replace the overdraft.

Setting up overdraft protection with a free savings transfer Capital One 360

Make sure to choose ‘Free Savings Transfer’:

Free Savings Transfer

Step Three – Redirect your employer’s direct deposit to your new Checking and Short-term Savings accounts

You’re doing great! Keep going and don’t get bogged down by the one-time annoyance of these last, crucial steps. If your employer offers direct deposit of your paycheck into your bank account (most do), set it up/change it so that your monthly Fixed + Discretionary amount is going straight into your 360 Checking account. See the FAQ below if you aren’t able to do this because.

In our $3,000/month example, if you get paid monthly, then set your direct deposit to put $3,000 per paycheck into your Checking, with the remaining balance going into your Short term Savings. If you get paid twice per month (semi-monthly), divide by two and deposit $1,500/paycheck into Checking. For biweekly/once every two weeks, multiply your monthly amount by 12/26 (ex: $3,000 * 12/26 = $1,385 per paycheck.)

(If you haven’t already, make sure to set up pre-tax contributions to your company’s 401k  with at least 10%-20% of your paycheck up to an IRS-maximum of $18,500/year (for 2018), or at a bare minimum, enough to collect any employer matching that you might be eligible for. If you use an HSA, you should also schedule automatic contributions to come straight out of your paycheck via your employer.)

Step Four – Set up automated transfers from your 360 Checking into your Discretionary 360 Savings accounts

From Capital One 360, click any account, then click ‘Transfer Money’ (top-right), and set up your ‘Monthly’ budgeted amount for the 5th of each month to go into one of your Discretionary category accounts (ex: $300 for Travel.) Do this for each of the accounts you created earlier. Make sure to first fund the account with a months’ worth of money, or schedule the transfer far enough out to give time for your direct deposit to occur.

Monthly discretionary transfers

The idea behind this is that from now on you’ll first check to make sure you have enough money in that discretionary account before you spend it.  After you spend the money, you’ll transfer the amount spent into your Checking account (or wherever the bill will get paid from.) Let’s say I want to buy a new couch that will cost $400. I first make sure that I have at least that much in my Household saving account, then I buy the couch with a credit card that auto-pays from my Checking account. Right afterward, I transfer the $400 from my Household account into my Checking, so that when my credit card bill comes due my Checking has enough in there to pay the added couch expense.

Step Five – Redirect your credit cards, payment accounts, and other bills to all get paid automatically out of your 360 Checking account

Now that you’ve set up all your accounts and recurring transfers and deposits, set up autopay on any credit cards or other bills that you have to come from your new 360 Checking account, preferably on the 3rd of the month, if you have a choice. Make sure to also make your 360 Checking account the default choice for any payment services you use like Paypal/Ebay, Venmo and Apple or Android Pay.

Go through every utility and service provider that you get a bill from and set up autopay, opting in to paperless emailed statements as well, including your landlord or mortgage company.

I try to pay all my fixed expenses with one credit card for simplicity. When I can’t pay by credit card, I use automated bank transfers, like for my public utilities, or online rent payments. (You can also get cash from your 360 Checking with no fees from any Allpoint ATM, and can request physical checks too from Capital One.)

Even rent payments to old-fashioned landlords that require checks can be automated since Capital One 360 allows you to schedule mailing a physical check using their bill pay.

You can also use a special credit card to pay for one specific discretionary category, and then set up that card to autopay straight from that Savings account. I use a ‘No Foreign Transaction Fee’ credit card specifically for travel expenses which I autopay straight from my Travel savings account, but then use a different rewards card for all my other expenses.

Congratulations, you’ve finished the one-time setup and are ready to use your new bulletproof financial system!

Step Six – Ongoing maintenance: transferring discretionary payments

Anytime you want to spend money that falls into one of your discretionary categories, 1) check to make sure you have that much in your corresponding Savings account, then 2) once you make the purchase, immediately transfer the spent amount from the corresponding Savings account into your Checking account (ehere the bill will get paid.) I use the Capital One 360 mobile app. This is the one manual step that you must do to stay on budget. Get in the habit, and it becomes second nature. You can also juggle money between discretionary accounts as needed. The only Iron Rule is to stick to your total spending goal of Fixed + Discretionary.

If you find that your estimates weren’t quite right, and you want to adjust how much you spend in different categories, or need more or less to be deposited into your 360 Checking each month, just tweak the steps above. The goal here isn’t to deprive yourself of spending money on things you love, or to meet someone else’s standards of what you “should” spend money on. Instead, you set your own spending priorities in a way that will keep you ‘honest’ on them, while allowing you to spend every dime that you’ve allocated for yourself guilt-free, since you know that your savings & budgeting is now all being taken care of automatically.

Step Seven – Ongoing maintenance: investing the Short-term savings for the long-term

You should periodically invest all of that money that will be piling up in your Short-term Savings account. Log into your investment account (or open one) and link your Short-term Savings account to it so that you can electronically transfer money.

Whenever I notice that a thousand bucks or so have accumulated into my 360 Short-term saving account, I log into my Vanguard investment account and transfer it into my Target Retirement Fund. Choose a Target fund with a year that is 15 years after your planned retirement date. E.g.: if you’re 30 and plan to retire at age 62 in 2050, choose the 2065 option. Fidelity and other money managers also have these funds. Make sure you’re paying low fees (less than 0.2% is ideal) and are broadly diversified.

There you have it. In just a couple of hours you’ve completely changed your financial life so that you know exactly how much you’re spending each month (without any ongoing budgeting), and have put yourself on the path to saving for financial independence.

Closing Thoughts

Each year, or whenever you have big money changes (have kids, buy a house, get married, change jobs), you can review your plan and adjust as needed, but try to set something that you’ll stick with for a long time so that you can truly be following the plan that you set for yourself. For me, sticking to my original budget that I set for myself 6 years ago has become a [nerdy] financial challenge that’s allowed me save more and more as my income has increased while keeping vmy spending constant. (But I’m definitely not depriving myself; nor should you! There’s still plenty of room in my personal budget for my hobbies, trips overseas, whiskey, and nights out with the lady or friends. Instead, the budget forces me to build DIY skills and prioritize what’s most important in my life.)

Recommended optimizations – Get cash with no ATM fees anywhere in the world

Whew… We’ve covered a lot of ground, but there’s one more item I recommend doing. If you use cash for some of your expenses, set up a Charles Schwab Investor Checking account. You can then use that to withdraw money from anywhere in the world and Schwab will refund your ATM fees at the end of each month. You’ll have to set up a Schwab brokerage account too, but there’s no obligation to fund or use it. (I don’t, and I’ve had the account open for years with no problems.)

I like to use cash as my going out/eating out/fun money so that I don’t have to worry about transferring money to my Checking every time I want to eat out or buy a drink at a bar. There’s also something about physically seeing the ‘pocket money’ I have for the month that helps me mentally plan out what I can spend. To make this easy, I add one more direct deposit step that sends my cash to my Schwab checking account each pay period. For our $3,000 example, let’s say our Single Person wants to use $250/month in cash to pay for Going/Eating Out. Instead of creating a Capital One 360 Savings account for that, their direct deposit will send $250 straight to Schwab from their paycheck, and only $2,750 to their 360 Checking, with the balance still going to Short-term Saving as before.

Now, they just use their Schwab ATM card whenever they need cash (and will get a ‘hard-decline’ by default if they run out, which is free, but could be embarrassing if you’re using the card as a debit in a public setting :). Just use your credit card as a fall-back and transfer money later if this happens!)

FAQ

Q: What if my employer doesn’t offer direct deposit / they don’t allow me to specify a fixed amount to go to one account and the balance to go to another / I’m self-employed?

A: Just deposit your whole paycheck into your 360 Short-term Savings account. Then, within Capital One, click any account, click ‘Transfer Money’, and schedule a monthly transfer of your monthly budget amount (ex: $3,000) at the beginning of the month from your Short-term Savings to your 360 Checking account:

Capital One 360 Transfer from Savings to Checking

Q: Do I have to use Capital One 360 for this system to work?

A: Ally Bank will work for this system too. Whichever bank you choose must let you create multiple savings accounts for free with no minimums, AND schedule recurring automated transfers between accounts. Feel free to suggest other banks that meet these requirements and that you have personally used in the comments.

Q: Why schedule the transfer for the 5th of the month?

A: Scheduling for the 5th of the month will help group all your monthly bills together, ensure that any end/1st of the month paychecks have time to hit your account beforehand, and that 1st of the month bills like rent get paid first. You should also set up your credit card(s) and, if possible, other bills to be paid around the 3rd or 4th, just prior to these transfers.

Q: What if I’m retired?

A: Just treat your fixed income, such as social security or a pension, as your ‘paycheck’, and deposit it in the way described above. If you’re also drawing down your personal retirement investments, you can set up monthly recurring withdrawals to fund your checking account.

Should we just let all the immigrants in?

My girlfriend and I recently moved from my home town of Seattle, Washington to northern California. In the Bay Area, even more so than in Seattle, immigrants of all kinds, but especially Hispanics, dominate the human landscape. I already had a pro-immigrant bias before moving here, but I’d like to share a few observations that have made me even more in favor of working out a way for as many foreigners as possible to come to the United States to live, work, and enrich their lives and our society with their contributions.

I rented a 15′ Uhaul truck with a tow dolly for my car, and with the help of my power-lifting girlfriend and a few friends, loaded all our worldly possessions into it and drove the 850 miles to our two-bedroom apartment in Palo Alto.

Not wanting to saddle my hapless love with yet another day of carrying heavy things, I drove to Home Depot the next morning to hire some help. A couple of middle-aged Hispanic guys were chatting together in the parking lot, and I asked if they new anyone who’d be willing to help unload a moving truck for $20/hour for what I estimated would be a 3 – 4 hour job. One of them asked what I was moving, and after I described the two queen beds, couch, and other assorted furniture, he said he was game, and I drove us back to the apartment.

Jose, I’ll call him, worked tirelessly with me, hauling everything up carefully, only accepting some bottled water as a benefits package, and politely declining my invitation for lunch. He said little, but worked hard and continuously, clearly having done this before, and offered wise, laconic advice on the proper way to turn a chest of drawers, or to rotate a box spring into the house. We finished in record time, about 2 hours, after which I drove him back to Home Depot and rounded up his wages to $80 as a token of his industriousness (and with admonitions of my girlfriend not to ‘exploit’ our new worker ringing in my ears. She is less enthusiastic of being a part of the job-creating class than I am.) Jose gave me the first smile of the day, thanked me, shook my hand, and went on his way.

Jose spoke English decently, and told me in our brief conversations to and from his erstwhile job site that he had lived in East Palo Alto for 10 years in a bedroom he rented for $1,000 a month; it was $500 only 4 years ago, but inflation has crept up everywhere in the Bay. Jose did mostly carpentry and other construction work, and sent money back to his family in Mexico. He indicated it was too dangerous for him to be in Mexico, but said his family was safe when I asked about them.

I have no idea whether Jose is here legally or not, and frankly I don’t really care. I needed someone to do tough, brief work with me ASAP for a reasonable price, and Jose came through in spades. This was the first time I’d ever hired a day laborer, and it worked out wonderfully.

This story illustrates what I’ve observed from varying distances hundreds of times: most immigrants to the United States work honestly, intelligently, and hard, often harder than native-borns like myself, either because they have to or because the ones who attempt to come here are more motivated and skilled than those who don’t.

The immigrants I know in America include:

  • The Hispanic yard maintenance guys shoveling dirt out of a pickup truck on Thanksgiving day while I strolled by leisurely after eating a gut-busting turkey dinner with my family.
  • My very bright and thoughtful Indian data analyst colleague who earned his Masters in the midwest, studies American politics more closely than I do, and told me about his trip with his friends to Glacier National park, describing a spot that was the “most beautiful place in the world” that he’d ever seen. He fortunately beat the odds in the H1-B visa lottery, managing to win a 3-year extension to his visa, despite only a 40% chance. I feel bad for the other 60% working just as hard and intelligently as him, and contributing just as much in economic surplus and taxes, who had to disrupt their productive lives and relationships in the US and return home through no fault of their own.
  • The Mexicans migrants in wide-brimmed hats picking strawberries in the 100 F heat with while I roadtripped in air-conditioned comfort down to Monterrey Bay to enjoy a county fair last weekend, stopping at a farm stand to buy some of the delicious, hand-picked fruit for a song.
  • Countless other other coworkers, neighbors, restaurateurs, Uber drivers, friends, and friend’s parents, all of whom came to the US seeking a better life for themselves and their families, and most of whom found it.

I also think about the would-be immigrants whom I’ve had less contact with, but whose stories are even more poignant in their rejection. I met a thin, boyish-faced man of about 40 in a rural village in the Philippines who was the youngest son of a mother who emigrated to the east coast of the US 15 years ago to work as a nurse. His dream all these years had been to join her there and live and work in America. He worked in construction and carpentry in the Philippines where wages are about $6 per day for unskilled day laborers, and stressed how he could have, and would have, done nearly any type of work in the US in order to move there. After finishing his story, he stared off wistfully for a few seconds, and then stated simply that he’d given up on his American Dream. His annual visa applications had been rejected year after year, despite his mother and her stateside friends’ entreaties on his behalf, and he had decided that fate–or more likely God; the Philippines is very Catholic–clearly did not intend for him to make the move.

My weekend to the Monterrey fair ended with a rodeo. The audience was probably 80% Hispanic. One announcer narrated in English, and the other in Spanish. Both the Mexican and American flags were presented, and both national anthems were played. The bronco riders were a mix of brown and white faces, and were cheered by all. Four white US servicemen performed a bull-dodging stunt while surrounded by rings of fire, and a European bullfighter had been flown in to leap impressively over a charging bull (three times!) It was the only US spectator event in my memory where as a white person I’ve been in the racial minority, but I felt perfectly welcome. The mariachi bands, elephant ears, tacos, 4-H exhibits, crowds of happy families, and the mix of languages all blended together for a uniquely enjoyable American experience.

That fair was a microcosm of how I view immigration to America: there are many pillars of the American system that people come here for and that are mostly enjoyed and revered by all of us. The elephant ears, corn dogs and wooden roller coasters are the rule of law, freedom of, or from, religion, and a peaceful political process. Other things that immigrants bring to America may not be for everyone (spicy salsa, or burkas, say), but as long as they don’t violate the rights of others living in American, we tolerate them peaceably, even if we view them with suspicion (deep-friend Twinkies, say.)

The real win is when immigrants bring something new and valuable to this country, as they have done for hundreds of years. Just consider food and drink alone, which I’m prone to do…:

The Germans brought beer (God bless them!), the Italians pizza and pasta, the Scottish whiskey, the Jews, in league with the Irish, corned beef and cabbage. More recently the Japanese brought sushi to our collective table, the Chinese gave us dim sum as a hangover-curing brunch alternative, and from Mexicans we obtained the taco, which is probably the most revolutionary thing to come out of Central America since Pancho Villa.

I rest my case: Viva la inmigración!

All of Jeff Bezos’ Amazon Letters to Shareholders together in one PDF

For your reading pleasure and business edification, here’s the complete set of Amazon Shareholder Letters penned by CEO and founder Jeff Bezos in one handy PDF file:

Jeff Bezos – Compilation of Amazon Shareholder Letters 1997-2016 – FINAL.pdf

This volume starts with the classic and first 1997 letter to the 2016 letter, which just came out. Bezos is known for his clear and profound thinking about business generally, how to delight customers, and how to build and sustain an incredibly innovative enterprise.

(Special thanks go to the good people that maintain the free version of PDF Split and Merge which I used to compile this, and to whomever already did the work for letters from 1997 – 2012.)

Ward’s 2016 Washington State, King County, and Seattle voter’s guide

Washington State’s November 2016 election ballot is chalk-full of important initiatives that require careful consideration.  I’ve given them that, and give you my recommendations below.  With one exception, this guide will NOT cover individual candidates, as I believe that territory is too divided along partisan lines.

5 minute voting guide

Seattle

WA State

  • STRONG YES on Measure 732 – Make polluters pay their fair share for putting our collective home, Earth, in jeopardy via a proven and effective carbon tax. 732 reduces taxes on non-polluting things to boot!
  • NO on Measure 1433 – $15 minimum wage for WA state: This one requires a lesson in microeconomics that is not easy to deliver in a couple sentences: High minimum wages cause the least-skilled & most vulnerable (poorer, younger, less-educated) workers to lose jobs. This isn’t just theory, it’s already happening in Seattle due to the jump to $11 per hour. I discuss this one more below.
  • YES on Measure 1464 – Campaign finance reform with restrictions on lobbying by former politicians. Also restricts donations from potential state contractors and others with sleazy, non-democratic interests.
  • YES on Measure 1491 – Reasonable tool to try to reduce firearms access for those in imminent danger  of hurting themselves or others, complete with constitutional protections based on existing legislation for restraining orders. Don’t worry, the state can’t simply walk into your house and take your guns on a whim, I promise.
  • STRONG NO on Measure 1501 – Don’t believe the title of this bill; it’s a misleading scare entirely bankrolled by a very strong union (the SEIU) to hide its public employees from public record to keep these employees for learning about their rights. Seriously. It’s ugly. The Seattle Times explains.
  • STRONG NO on Measure 735 – Does nothing regarding Citizens United/corporate influence in politics, but has some harmful suggestions such as removing non-profits from lobbying. The Seattle Times explains.
  • YES on the Advisory votes 14 and 15 – Doesn’t do anything binding. Recommends maintaining consistent, already-passed tax policies.
  • STRONG YES on Senate Joint Resolution No. 8210 – A governance ‘good house-keeping’ bill with no one opposed to it.

King County

  • YES on both Charter Amendments 1: make Prosecuting Attorney a nonpartisan office, and 2: update the 1950’s-era Charter language to make it gender-neutral: councilmember instead of councilman, etc. Turns out women serve in government too.

STRONG recommendations are based on how clear the evidence & likely outcomes of a decision are to me. They have nothing to do with how important the measure is.

Candidate Recommendation

I STRONGLY RECOMMEND Brady Walkinshaw for US Representative in District 7. He’s for 732, speaks intelligently and correctly on a wide range of issues, is whip-smart (Fulbright scholar, Princeton alum), has made big impacts in local government around improving the lot of the mentally ill, reducing our prison population, and improving the environment. He’s also 32, and would be the youngest member of congress, and might actually know how to use the internet.

Brady worked for the Bill and Melinda Gates Foundation for several years, which is know for its rigorous, evidence-based approach to uplifting people. He also seems humble, pragmatic, and especially willing and able to work with Republicans–both candidates in this district are Democrats– to get things done. I also had the pleasure of meeting Mr. Walkinshaw at a “town hall” event, and was extremely impressed.

More thoughts on the initiatives

YES YES A THOUSAND TIMES YES on 732 – carbon tax

Carbon taxes, along with ‘cap and trade’, are the smartest kind of global climate change legislation. A similar carbon tax has been working successfully already in British Columbia. This bill is also revenue-neutral, which means no extra taxes, and no budget cuts either (or at least very small ones either way, depending on how the math works out.) Businesses will now pay for their pollution costs, but they and their consumers (read: us!) will get a break on producing and buying pollution-free goods. Those on the left that oppose this are either fools or hypocrites, or both.

NO on 1443 – $15 minimum wage in Washington state

Don’t, through good intentions, close the door on the lowest-skilled folks in society by forcing their cost above what businesses would pay. High minimum wages cause the least-skilled & most vulnerable (poorer, younger, less-educated) workers to lose jobs because they can’t get jobs at the (lower-than-new-minimum) wages that employer’s would be willing to pay them. Thus, these folks lose, and employers hire a few less workers, who are more skilled, at the higher minimum wage. Employers might also automate a little more and do other things to reduce their labor needs.

This is happening in Seattle already, as explained here.

Help the working poor instead by improving their skills (education, job-training & vocational programs), providing cost-effective services (health & child care, which might also make poor children more socially mobile), and allowing the poor to keep more of what they make (income tax reductions for the poor & things like the Earned Income Tax Credit.)

Another overly-simplistic way of looking at this is that I’d rather pay 10 people $9/hour then 9 people at $10 per hour and have the least skilled guy be unemployed.

My background and biases

I have an MBA from the University of Washington, focusing on economics & finance, and two degrees in Physics. I’ve worked as a financial advisor, data analyst, and engineer. I’ve researched each measure thoroughly, spending about 12 hours total on the entire process, and have consulted several sources*.

What I believe in

Utilitarianism: I believe every individual’s well-being is of equal intrinsic value, be it a Washington voter, a felon, or an African living halfway across the world. The goal of policy should be to promote the greatest happiness across the greatest number of people**.

Libertarian paternalism: I also believe that individuals themselves are usually the best judge of what will make them better off, and that ‘freedom’ (bounded by laws to protect others’ liberty) and markets (i..e: collective free choice) are the defaults that usually lead to the best outcomes.  That said, institutions can improve humanity’s collective lot further by shaping choices to help individuals in areas where we know humans do badly for themselves, including cases of addiction, mental illness, or more mundane mental problems like laziness or poor statistical reasoning (automatic 401k contributions are brilliant, for example.) Also, there is room for governments to engage in wealth redistribution or other measures that boost the total world’s well-being, after adding up the social costs & benefits.

I generally favor more choices for people as opposed to fewer. I also believe society should often reallocate its resources to the people who have the least in the world, being careful not to create bad incentives that decrease our prosperity net of distributive benefits. The simple fact is that the amounts given up by the well-off often does much more good when received by the worse-off. For example, $3,500 can save a life in Africa, but will barely get you a college quarter’s tuition in the United States.

Footnotes

*Credit for my conviction, or rather conversion, against high minimum wages goes to my microeconomics & finance Professor Edward Rice, who held a riveting lecture on Seattle’s $15 minimum wage law prior to that vote last year. He and the majority, but certainly not entirety, of economists and their studies on the subject finally convinced me that high minimum wage laws (defined as, say, > 50% of the poverty level), well-intentioned as they might be, actually hurt the working poor, and society as a whole.

**Technically, I would amend this to ‘the greatest well-being for the greatest number of sentient beings’, which would include animals that can suffer/feel pain. As Jeremy Bentham said, “the question is not, Can they reason? nor, Can they talk? but, Can they suffer?”

***A good explanation of how inefficient & costly rail, and unfortunately, other public transit systems are, can be found here, and light rail specifically here. My one criticism of this analysis is that the author doesn’t account for global climate change externalities (which he DOES incorporate others), but I suspect that would make little difference in the calculations and conclusions. All hail the carbon tax & flexible, cheaper bus system instead!

How does your credit score stack up against the average for your age group?

I ran across this article while trying to find some data on average/median credit scores by age group.  They had a handy graph (see below), courtesy of my favorite free FICO-like credit score site, Credit Karma.

Why should you care about your credit score?

As financial writers like Ramit Sethi have pointed out, your credit score is crucial when it comes to saving BIG BUCKS on loans (via a lower interest rate) for items like cars & homes.  Additionally, folks ranging from landlords to employers to cable companies are using credit score to evaluate you, so keep your credit score high!

What the data says

As you might expect, credit scores tend to increase with age.  Those aged 25 – 34 have an average credit score of about 650, while those over 55 have an average of about 725.

Another useful metric is the FICO median credit score for the US, which is 723.  (‘Median’ means 50% of people have a score below 723, and 50% have one above, whereas average just combines everyone’s score & divides by the total population, which allows really bad, or really good, scores to move the average a lot more than they’d move the median.)

Since the median method of calculation keeps terrible scores from dragging down the average (which is probably why it’s higher than the average score shown in the chart below), this is probably a better measure to benchmark yourself against if you’ve never had any terrible credit history (default, bankruptcy, foreclosure, etc.)

So, where do you rank?

I recommend you get your credit score by signing up (quickly, and with no hassles or gimmicks!) for a free account at creditkarma.com.  (I’ve used them to check my score every year or so for the past few years, and have been very happy with their site.)

Anything over 750 range is good, with a good goal being around 780 or above.

Check out the above-linked article from Ramit Sethi on how to improve your credit score if it needs a boost!

2013 retirement account updates – IRS contribution limits increase for IRAs and 401ks!

IRS contribution limits for 401ks/403b plans will increase to $17,500 in 2013 (up from $17,000 in 2012).   The 50+ age group can contribute an additional ‘catch up’ amount that will remain at $5,500 for 2013.

Additionally, Roth IRA contributions will increase from $5,000 in 2012 to $5,500 for 2013 for those under 50, and $6,500 in 2013 for those 50+.

For those boss ballers making six figures (nice work!), the Roth IRA contribution phase-out range is Adjusted Gross Income (AGI) of $112,000 to $127,000 for single tax filers, and $178,000 – $188,000 for married filers.  This basically means you can’t make ANY Roth IRA contributions if your income is at or above those levels.  If you’re close, check with your accountant, or crunch your AGI numbers in a program like Turbo Tax come January/February to determine if you can make any contributions for tax year 2012.

Keep stashing as much cash as you can in those tax-advantaged retirement vehicles!

Details: http://www.irs.gov/uac/2013-Pension-Plan-Limitations

Ward’s 2012 Washington State, King County, and Seattle voter’s guide to the issues

Washington State’s November 2012 election ballot is chalk-full of important initiatives that you have a duty (that’s right) to vote intelligently on.  To help with that, I’m going to go over my recommendations below.  With one notable exception this year, this guide will NOT cover individual candidates, as I believe that territory is too fraught with political biases to be worthwhile to an unsympathetic reader.

Why should you give any credence to what I say?  Because I’ve researched each measure carefully, consulting several sources, am highly educated (two college diplomas and an MBA, with a solid background in economics, finance and even some philosophy), reasonably intelligent, and thoroughly rationale and critical.

My biases: I take it as given that each individual’s happiness is equally important (be it a Washington voter, felon, or Chinese guy), and that the goal of good policy should be to promote the greatest happiness across the greatest number of people.  (I.e.: I’m a died-in-the-wool Utilitarian after the fashion of Jeremy Bentham.)

These positions follow from the above philosophy:  I generally favor more choices for people as opposed to fewer (because people are usually made better off with more choice, except in certain cases.)  I believe society should often reallocate its resources to the people who have the least in the world (being careful not to create bad incentives that decrease our prosperity), as the amount given up by the well-off often does more good as an amount received by the worse-off.

As a simple example, Bill Gates wouldn’t miss $20 (and nor would most of us), but that same $20 can buy vaccines in Africa that could save a life.

Without further ado, here’s how you should vote (and why)!

State issues:

Ref 74 – Allow the gays to get marriedAPPROVE.  (Note that this bill preserves the right of religious organizations to refuse to perform, recognize, or accommodate any marriage ceremony, like that of a same-sex couple.)

502 – Legalize, regulate & tax marijuana – APPROVE.

Marijuana doesn’t appear to be particularly harmful.  Let’s let adults make adult decisions about what (at worst) mildly harmful substances they choose to ingest of their own free will.  Furthermore, policing marijuana has been largely a failure, and is extremely costly.  Instead, this bill will stop treating ADULT (21+) casual weed users as criminals, and turn weed use into a profitable source of state revenue for education, etc.

1240 – Public charter schools in WA state: APPROVE.  We need to explore more options in improving public education in WA state (and nationally), and allowing freer rein to nonprofit school administrators in a select group of 40 public charter schools seems like a very reasonable way to try some new things in education.

These charter schools are still publicly-funded & publicly-accountable schools (read the description of the bill before you go spouting off misleading WEA-influenced rhetoric willy nilly.)  They’re open to everyone, regardless of income (there’s no tuition, overflow applications will be handled by an impartial lottery), and they don’t ‘take money from public schools’ in the sense that they ARE public schools, run by a nonprofit org, and therefore get money from existing public school sources.  They are simply ALTERNATIVES to existing public schools.  They have to maintain the same hiring & educational standards as all other WA state schools.

Charter schools may not end up being the ‘answer’ to our less-than-stellar education system, but let’s please at least explore the possibility (and then measure & analyze the results), rather than being defeatist by opposing any new innovations in public education.  THINK OF THE CHILDREN! J

8221 & 8223: APPROVE each – Take a look at the 2012 Legislative voting: hardly anyone on either side of the political aisle opposed these bills of fiscal reasonableness, which is a good sign that we should pass them.

Advisory 1 – MAINTAINED – Recommend to the legislature to maintain the closure of a business tax deduction (aka, a tax ‘loophole’!)  I’m all for eliminating deductions favoring silly things, even when popular (I’d LOVE to see the homeowner’s mortgage interest deduction go away, but it’ll never happen.)  In economic theory, such loopholes distort incentives, and are bad for economic efficiency (unless they’re correcting/promoting for negative/positive externalities, like taxes on gasoline, which are a good thing, and should be higher!)  Plus, WA need revenue, so let’s close this and collect some.

Advisory 2 – MAINTAINED – See above rationale.  This time we’re taxing a negative externality-causing thing, petroleum, and perhaps correcting for subsidizing of negative externalities).

BTW, neither of these advisory votes matter that much since they won’t change the law by themselves!

Seattle & King County

APPROVE both Prop 1 in King County (fingerprinting levy to aid law enforcement) and Prop 1 in Seattle to rebuild the crumbling Alaskan Way seawall.

2012 Bonus recommendation – Ward’s votin’ Republican in the Governor’s Race

WA State governor:  I normally don’t post any of my partisan (Dem vs Republican) recommendations, since I want to restrict this guide to a non-partisan review of issues, vs politicians, but I’m going to break this rule for this notable reason: for the first time in my (relatively short) electoral life, I’m voting for a Republican, Rob McKenna, for WA state governor.  (The Seattle Times also recommends Mr. McKenna, along with a few other Republicans, as well as Democrats, that I will be voting for in large part due to their recommendation rationales.)

In short, McKenna seems to be more thoughtful and have more detailed, practical plans on tackling tough issues like education & health care costs in WA state than his opponent, Democrat Jay Inslee.  Inslee seems mostly full of hot, nice-guy-that-you’d-have-a-drink-with political air, spouting vague platitudes which I generally agree with in principle, but that don’t seem to have any practical implementation behind them.

While I disagree with McKenna’s backing of Eyman’s initiative to prevent the legislature from passing taxes without a 2/3s majority (because I think it will hamstring our legislature’s ability to close loopholes & properly fund voter-approved measures, and puts us on a road to major fiscal problem similar to places like California that have tried such a thing), I think McKenna is the best choice for governor of the two.  He has the strongest plan & apparent commitment to fund higher education (he wants to increase state funding from 30% to 50% of the cost of tuition), and he also seems serious about introducing measures to reduce the cost of health care at the state level (by favoring Health Savings Accounts & increased competition in state health care plans.)

You can find a comparison of McKenna & Inslee on the issues here: http://seattletimes.com/html/localnews/2019488749_govissues21m.html

And also here, which includes a video of the first gubernatorial debate: http://www.diffen.com/difference/Jay_Inslee_vs_Rob_McKenna

Highlights from the Berkshire Hathaway shareholder’s meeting 2012

I finally got around to visiting Omaha to hear superinvestor & ‘world’s 3rd richest man’ Warren Buffett and his business partner Charlie Munger hold forth at the annual Berkshire Hathaway shareholder’s meeting on May 5th, 2012.  For those of you who aren’t Buffett fanatics (you should be; start with this, then this, and then read these), Berkshire Hathaway is a conglomerate of insurance companies & other businesses that Warren Buffett has presided over for some 35+ years, and has returned ludicrous results to its investors (which are NOT likely to be repeated, mind you!)

Every year, thousands (about 35,000 this year) flock to Omaha to hear about the condition of their beloved company, to shop at Berkshire subsidiaries like See’s candies and GEICO, and to catch the pearls of wit & wisdom that drop from the mouths of Buffett and Munger.

Watching the dynamic of Buffett & Munger as they each added their ‘2 cents’ to the varied discussions was highly entertaining, and often elucidating.  Buffett, long-spoken, friendly, upbeat, and literary, was contrasted and complimented by Munger’s laconic, pessimistic (he might say realistic), and sharp-tongued (and often hilarious) responses.

My notes

Lest such pearls escape me, I furiously scibbled notes during the 5 hour question & answer session during which Buffett and Munger deftly responded to questions from investors, media, and analysts on a host of topics ranging from investing to politics to ethics.

Here’s the ‘best of’ what I was able to catch and jot down.  Please note that while I often tried to capture exact quotes, a good deal of even the quoted material may not be ‘word perfect.’

The newspaper business

One shareholder asked Buffett about the recent purchase of a (print) newspaper, the Omaha-World Herald.  Given the declining economics of print media, the shareholder was (quite rightly) concerned about the future of newspapers.  Buffett responsed that he “believes in newspapers where there’s a sense of community.”  And explained that papers must have “primacy” (primary importance) in an area that the people who read it are interested in.

He described how traditional domains of newspapers (stock prices, classified ads, real estate listings) no longer have ‘primacy’ for their readership, who have largely moved on to the internet as the primary source for such info.  However, Buffett believes that community papers with local issues (like obituaries) can still thrive in the digital age, so long as those papers can remain as the most important source of that community-centric information for the paper’s readers.

Management of Berkshire’s businesses

Buffett often talks about the quality of management hired to run Berkshire’s subsidiaries.  Buffett claims to do nothing more than 1) make capital allocation decisions with the cash that Berkshire’s subsidiaries create and 2) create an environment (including compensation arrangements) to retain and attract top-quality managers.

Commenting on how independently competent Berkshire’s managers must be when it comes to running their operations, Buffett commented that “if we thought the success of our investment [in a subsidiary] depended on our advice [to management], we wouldn’t make the investment.”  In describing the work environment for managers that he tries to create, Buffett noted that he “can’t create passion in someone, but he can take it away [through a bad management structure.]”

One aspect of creating a good management structure is appropriate compensation. Berkshire has hired two former hedge fund managers to invest funds for Berkshire’s own portfolio.  These managers will receive 10% of any 3-year rolling gains above the S&P 500, incentivizing them to beat the stock market average, but also making sure they have to do it on a long-term basis.  Additionally, 80% of each individual’s bonus will come from his own efforts, but 20% will come from that of the other guy’s performance, as an incentive for them to work together and share investment ideas.

Munger added that “90% of those in the investment business would starve to death on that [compensation] formula.”  (Although I’ll add that each of those two Berkshire investment managers also receive a ‘base’ salary of $1 million per year, so ‘starvation’ probably shouldn’t be taken literally.  Interestingly, any employees or other expenses that these managers create must come out of that $1 million, which I thought was a nice way to sync incentives between the managers and Berkshire.)

Buffett also talked about how Berkshire didn’t use ‘compensation consultants’, who, in Buffett’s opinion, generally just tell CEOs and boards what they want to hear anyway.  In straight-faced monotone, Munger opined that “prostitution would be a step up” from compensation consultant, to which Buffett quickly added “Charlie’s in charge of diplomacy at Berkshire too.”

Creating shareholder value

When asked why Berkshire wasn’t paying a dividend, Buffett answered that “we feel we can create more than $1 of present value per $1 retained.”  Munger said he thought that “Warren’s learned new things each decade, resulting in much better results” at Berkshire than expected at the outset of their venture.  Munger, 88 years old & 7 years Buffetts senior, then added wryly, “but he’s getting old; I’m worried about him.”

Competitive advantages

“We sort of buy[s] barriers to entry; we don’t build them”, said Munger.  Buffett gave the example of the brand strength of Coca Cola, and how virtually impossible it would be to take away their market power.  Richard Branson, found of Virgin Airlines, and other Virgin companies, started ‘Virgin Cola’, which failed.  Buffett made the remark that “people say a brand is a promise.  I’m not sure what [Branson] was promising” with his cola brand.

Gold

Buffett noted that “if you caress an ounce of gold for 100 years, you’ll still have one ounce of gold”, and then compared that to the huge growth in what you’d have from growing businesses that pay out and reinvest cash, or to farmland that produces valuable crops every year.

This fundamental principle, that gold doesn’t actually ‘produce’ anything, is behind the fact that only periodic and unanticipated demand for it can drive the price up.  This also explains why, despite the last several years of the run up in gold prices, gold’s real return (after inflation) has only been slightly positive.

If one compares that to the massive growth of stocks, and even the modest growth of bonds, over long periods of time (not to mention the price swings of precious metals), it’s clear that gold is a very poor investment in itself.

Politics

When asked about the prevalence of the corporate political fundraising vehicles called ‘Super PACs’, Buffett stated that, even if donations to such a vehicle would increase Berkshire’s profits, he was morally opposed to it, and wouldn’t do it: “The whole idea of Super PACs is wrong, and relatively huge money [going to politicians] from a few people is wrong.”  While he acknowledged that others might defend their contributions to Super PACs by pointing out that their corporate competitors are doing it, Buffett asserted that “you have to take a stand somewhere.”

Munger added that he might consider giving to a Super PAC if he actually thought he could stop something really bad, and gave legalized gambling as an example of something that “does us no good” as a society.  And that “making the securities market more like gambling” was also going on, and also bad.

Taxes

Buffett said that the tax code is important in sharing wealth, and that it may be the case that the natural “trend in democracy that pushes toward plutocracy.”  Therefore, we should use the tax code as a “countervailing balance” against this anti-democratic, and yet perhaps expected, outcome of our market-based economy and its liberal principles (I mean ‘liberal’ in the free sense, not in the left-wing sense.)

On corporate taxes, actual taxes paid by corporations were 13% of revenues in 2011, versus the marginal rate of 35%.  Despite the play that US corporate tax rates get in the press, Buffett stated that neither corporate tax rates nor balance sheets nor liquidity were holding back the US economy.  Buffett called medical costs the “tape worm” of American business, and noted that they composed about 17% of GDP, versus a mere 2% for corporate taxes.  Munger also added that he thought a Value Added Tax should probably come into play in the US.

Munger thinks that “Paul Krugman is a genius” but that he maybe too optimistic about “Keynesian economic tricks.”  He also asserted that, in the US (and presumably around the world), we’ve lost a good deal of our “fiscal virtue”.  “Everybody wants fiscal virtue, but not yet.  Like [Saint Augustine], who was willing to give up sex, but not quite yet.”

Energy policy

Munger said he supports subsidies for wind and electric cars “to wean us off oil and gas.”  It “would’ve been better to use up other [countries’] oil” and to have kept our own in the US as a “strategic reserve” over the past decades, said Buffett.  Munger agreed with this, saying “I’m a puritan and believe in suffering now and making the future better.  That’s how I believe grown people should behave.”

I thought this was a great quote, and that it bears on several issues facing the US, such as the ballooning debt that’s being placed on the backs of young people in America.  I personally feel that too much is being done in the US to avoid short-term sacrifice at the expense of future prosperity.

Recent market crises (Europe & also 2007-2008 in the US)

“Alan Greenspan overdosed on Ayn Rand as a youth…  Greenspan was really wrong [on his actions that helped precipitate the 2007-2008 US recession.]  He’d think an ax murder was okay if it happened in a free market.”  Harsh, and humorous, words from Charlie Munger on the former US Federal Reserve chairman.

Due presumably to the low interest-rate environment*, and the fact that yields aren’t significantly higher (in Buffett’s opinion) for long-term vs short-term bonds, Buffett noted that he’d “avoid medium and long-term [US] government bonds.”

* Bond prices move inversely with interest rates, so if rates go up, the prices of existing bonds go down (and vice versa.)  The longer-term a bond is, the more its price is affected by interest-rate changes, hence Buffett’s shyness about longer-term bonds.

Risk

Both Buffett and Munger dismissed the investment risk ‘measurements’ used today by many large money managers like sigma (standard deviation, generally of a normal distribution), beta, and value at risk (VaR).  According to Munger, ‘value at risk and such are … some of the dumbest ideas ever’.  They criticized heavily the ‘precise’ (but not necessarily accurate or even useful) mathematical models used by finance and math PhDs to try to predict various events with many decimal places of certainty (think of Long-term Capital Management to understand where Buffett & Munger are coming from.)

Munger repeated a story of investor Sandy Gottesman firing a young man who was a major ‘producer’ (i.e.: money maker) at Gottesman’s investment firm.  The producer objected to being fired on the grounds that, despite the alleged riskiness of his investments, he had made a lot of money for Gottesman’s firm.  Gottesman replied “yes, but I’m a rich old man and you make me nervous!”

Buffett equated much of the failure of math-heavy risk management with a poor grasp of history, and of the many investing blow ups of the past.  He said that he keeps copies of newspaper articles from market crashes as a reminder of worst-case scenarios, including one about a man who killed himself in a boiling vat of beer during the May 1901 crash!

Buffett noted in this year’s annual shareholder letter that risk is not the volatility of an asset, but rather the chances of a decline (or unsatisfactory gain, I would say) in purchasing power as the result of an investment.  As a financial advisor that helps clients reach specific goals that rely on the purchasing power of their investments, I agree that this is the only meaningful way to think about financial risk.

He also noted that you shouldn’t “risk what you have & need to get what you don’t have & don’t need.”  Wise words, and applicable to more than just investing.

Avoiding mistakes

“We’re always thinking about worst case scenarios”, said Buffett.  Munger adding “studying other people’s mistakes” was key as well, and that both Buffett & himself were keen students of “folly”.  “People with 180 IQs didn’t have an understanding of human behavior”, noted Buffett when describing the causes of recent blow ups around the turn of the 21st century.

Business schools and how to think about investing

Buffett criticized business schools for teaching ‘fads’, and also suggested he didn’t put much stock (no pun intended) in ‘finance theory’, like that of efficient markets or modern portfolio theory.  Charlie Munger commented that while there was some rationale for these topics, business school teachings on investing were ‘a considerable sin’.  (Despite this, I’d argue from other things each have said that Buffett & Munger do acknowledge some of the more general points of modern finance theory like market efficient MOST of the time.  They take issue with the ‘semi-strong form’ of market efficiency, arguing that publicly available information can be used to make profitable (after controlling for volatility) investments.  I think they also take issue with the use of finance theory as a tool with high predictive value in, say, valuing businesses and stocks.)

Buffett stated that he would have two courses taught to teach students about investing: one on how to value businesses (which I would assume would be done using accounting statements & other means to approximate future cash flows, and then discount those cash flows back to the present.)  The other class would be how to think about markets (e.g.: read Chapter 8 of Benjamin Graham’s ‘The Intelligent Investor‘.)  By thinking about markets, Buffett means that you should treat market prices as random fluctuations that are there to serve you (by sometimes offering prices that are lower than the value of what you are buying), not to guide you (i.e.: causing you to panic and sell when prices fall, or become gleeful when prices rise.)

The result of this business valuation would be to ‘understand’ a business.  To wit: “understanding a business means having a good idea around 1) its competitive position and 2) its earnings power 5 years from now”, said Buffett.

Munger added that if you receive any offer to buy an investment product with a large commission, “don’t read it.”  Instead, he suggested “looking at things other smart people are buying.”  That said, you must make sure you use others’ ideas only as starting points, and do all of your homework to ensure you understand the business, and can value it against its current price, factoring in some ‘margin of safety‘ in case your estimates are wrong.

More

If you just can’t get enough Buffett/Munger action, or else want to compare the validity of my ‘journalism’ to that of other sources, here’s some alternative coverage of the 2012 Berkshire meeting, along with some other related links:

NY Times considers Buffett’s politics: http://dealbook.nytimes.com/2012/05/07/reflecting-on-buffett-business-and-politics/

Highlights from the meeting from Reuters: http://www.reuters.com/article/2012/05/05/berkshire-meeting-highlights-idUSL1E8G52T920120505

Munger-mania! (Highlights from an awesome 2-hour U of Michigan speech, also available on YouTube) ‘The Motley Fool’: http://www.fool.com/investing/general/2012/05/04/charlie-munger-on-communism-botox-and-goldbug-jerk.aspx

Buffett talks to MBA students at Florida U in 1998 (great talk in 10 parts): http://www.youtube.com/watch?v=ogAxzPaU5H4&feature=relmfu

Access files on your home computer form anywhere in the world (by setting up a home FTP server)

NOTE: I wrote this post in Word originally, cutting & pasting images into it.  I haven’t yet figure out how to import the Word doc WITH images (short of having to use WordPress’ laborious process of inserting each individual image from my hard drive.)

SO, to get this post with the pictures (highly recommended), just open this Word doc and read the post that way:

How to set up a home FTP server – Windows 7 – FileZilla Server

POST WITHOUT PICTURES (download the above instead):

Start here: http://lifehacker.com/339887/build-a-home-ftp-server-with-filezilla and read through the instructions to try to get a basic idea of what you’re doing.  Then, come back to this guide for some step-by-step instruction to implement what’s in the link.

Step 1) Download & run the FileZilla Server installation package: http://filezilla-project.org/download.php?type=server

–          Install with default IP (127.0.0.1) and port (14147) settings.  (‘Cause these settings aren’t ‘used’ anywhere else.)

–          (!) Configure ‘passive mode’ settings to range above 1024 (ex: 60000 – 61000)

–          Set up users & passwords, along with access folders for those users.

  • Create a master user for yourself, and maybe another ‘read-only’ one for ‘guests’

Step 2) Windows 7 Firewall: Control Panel > Firewall > Advanced > Out & In: 60000 – 61000, [20, 21]

Windows 7 Firewall settings:

 

–          Must allow the passive ports that are being used to go IN & OUT (Control Panel > Firewall > Advanced …)

–          TEST IT: Try to test with another computer on the network (use FileZila Client and enter the home server computer’s IP Address (NOT the web/public IP!), like 192.168.0.2 or .3.

  • Figure out your computer/server’s IP address by going to Start (Windows Ribbon) > Run, then type in ‘cmd’:

This opens the command prompt.  Type ‘ipconfig’ into the command prompt and hit ‘enter’:

  • The ‘IPv4 Address’ is the one you want in this case.  Other computers/operating systems might just say ‘IP Address’ or something close.  The number in the above case is 192.168.0.3.  Yours should always be something like 192.168.0.X.

Step 3) Port forwarding (or, making your router forward to your computer):

You will need to do this if your computer is ‘behind’ a router.  I.e.: if you use a router that’s connected to your computer to then connect to the internet

–          ‘Port Forwarding’ on your router: http://lifehacker.com/127276/geek-to-live–how-to-access-a-home-server-behind-a-routerfirewall?tag=softwaretop

–          Make sure to set up an administrator username & password (write it down somewhere safe so that you don’t forget it!) on your router.

Step 4) Set up a URL to associate with your router’s IP address at freedns.afraid.org

Set up web access to your router/server

–          This link gives you an overview of what you’re going to do, but uses a different site than the one I recommend.  Read this to understand what you’re doing, then do the same thing at freedns.afraid.org:

–          I set up a URL at the http://freedns.afraid.org site with the address of w………..com.  I chose to use a free subdomain from the list offered by freedns.afraid.org.

–          This URL address (w….com) forwards to my router’s IP address (97.126…… in this case):

–          You can find your router’s address by opening a web browser window and typing in 192.168.0.1 into your browser address bar and hitting ‘enter’.  Then, look for something like ‘Status’ in your router’s configuration page and find the ‘IP Address’ of your router.

–          (If I hadn’t blurred part of it out, you could see from the below screenshot that my router’s IP address matches what my ward.ignorelist.com URL is forwarding to, which is the whole point!  The URL you set up at freedns.afraid.org must forward to your router, and the router then forwards to your computer’s IP address, which allows you to get all the way to your home server from the internet.)

–           

Step 5) TEST WITH NO FIREWALL

–          A) Use http://www.ftptest.net to test with Windows 7 firewall TURNED OFF after getting the web access set up via the http://freedns.afraid.org site (choose your subdomain & then find your network’s public IP (located in your router software’s status by going to (typically) http://192.168.0.1 in your browser) to link it to your new subdomain name.)

–          B) Once you’re successful with part A (see screenshot below for what success looks like), turn your Windows firewall back ON and do the test again.

  • If you are NOT successful this time, go back to Step 2 and figure out what’s wrong with your firewall settings that’s preventing this from working.

This is what success looks like:

Step 6) Dynamic DNS updates

ONCE THINGS ARE WORKING…

Meaning you can connect from the internet (using the FTP test site) to your server, then you need to set up something to update your IP address that your URL forwards to automatically.

This is because your router’s IP Address is ‘dynamic’, meaning it changes periodically, like when you reset your router and/or modem, for example.  In order to keep the IP address that your URL forwards to consistent with your router’s actual IP address, you need a piece of software that runs on your computer which will update freedns.afraid.org periodically with your router’s latest IP address.

Get Dynamic DNS updates for your freedns.afraid.org account:

ALMOST DONE: You now should have everything set up to use unencrypted FTP from your home computer to the internet.

Test this out by setting up the FileZilla client from another computer that’s NOT on your home network (say, your computer at work) to connect to your FTP server using the site address (your freedns.afraid.org URL) and the user credentials that you set up in FileZilla Server in step 1.

Once you have the unencrypted FTP working, take one last step to enable Secure (i.e.: encrypted) FTP, just as a security precaution.  You should use Secure FTP anytime you’re sending information back and forth that you wouldn’t want anyone else to be able to see.  I recommend ALWAYS using SFTP if you can.

Step 7) MAKE THINGS SECURE (Optional, but highly recommended)

http://www.hosting.com/support/ftp/setting-up-filezilla-for-sftp

(From FileZilla client, use ‘Explicit TLS’ so that you don’t have to specify a port (21 will still be used)).

Note: I still allowed plain FTP so that I could keep testing, and in case I need to.  I created a 4096 bit key for good measure.

IF YOU WANT TO DISABLE YOUR SERVER, OR START IT AGAIN:

To stop/start FileZilla server, CTRL + ALT + DELETE > Windows Task Manager (it appears that the admin login is just for administrative maintenance, and is NOT a starting/stopping of the service itself):

Intro to Insurance – What you need to insure (and what insurance to avoid)

Insurance.  The idea sounds pretty reasonable: you pay a smallish payment (called a ‘premium’) on a regular basis (usually monthly), and in exchange, when something bad happens to you or your property, the insurance company covers the damage up to an amount specified in your insurance agreement.

While the idea may sound simple, there are some very important things to understand in order to think about insurance correctly.

It’s a bad bet, but you still have to buy it

Insurance is what is called a ‘negative expectation’ bet.  The insurance company is out to make money.  As a result, they are going to make sure that, on average, they make more money in ‘premiums’ paid to them (from you) than in ‘claims’ paid out (to you.)  Sometimes they’re wrong, sometimes they’re right, but most of the time they’re right.

If getting insurance is a losing bet, then why should people do it?  For only ONE reason: to reduce risk.

Insurance companies, and their commission-seeking agents, will try to sell you unnecessary and expensive policies and options (called ‘riders’) for all sorts of reasonsUse this guide to make sure you only buy the necessary policies that serve the interests of yourself and family.

Risk

Human beings are generally risk-averse when it comes to money.  That means that they’d rather get constant income (think treasury bonds), than income that varies (think stocks.)   As a result, people are willing to give up some money in order to reduce their risks (loss of life, home, car, physical ability to work, etc.)

BUT, because insurance is a losing proposition, you only want to pay for just enough insurance to cover you against big losses.  Any loss that you can cover yourself (usually up to a few thousand dollars), should be covered by you.  This is one reason why it is important to build up and maintain a healthy emergency fund (of at least a few thousand dollars) in something stable like a high-interest savings account or bond fund.

From these principles, we can create a few general insurance-buying rules.

Rule #1 – Only insure what would be financially very painful to replace on your own

If your $3,000-valued used car gets totaled in an accident that’s your fault, it’ll hurt a bit to replace it on your own.  However, if you have some emergency savings, replacing it shouldn’t wipe you out financially.  As a result, you should probably avoid paying for collision auto insurance on a car of that little value.  (On the other hand, if you just bought a new Mercedes with them frog eyes, you’d better insure it.)

Similarly, if you have a $1,000 deductible (the amount you have to pay per accident before the insurance company will kick in anything) on your homeowner’s policy, and your roof caves in, paying that $1,000 shouldn’t cause you to fall on hard times.  Depending on your available savings, income, and comfort with risk, the amount you can pay to replace something without too much pain will vary.

That said, most people should be comfortable with ‘self-insuring’ for losses in the range of $1,000 to $10,000.  Anything over $10,000 should probably be insured (unless you’re really wealthy), and anything under $1,000 should definitely be self-insured by keeping an emergency stash.

One exception to this rule is if somebody else (your employer, the government) is subsidizing the cost of your insurance by paying a substantial part of your premiums.  This often changes the math in favor of you getting more insurance coverage than you would if you had to pay for it on your own.

Rule #2 – Keep your deductibles high and your premiums low

Related to rule #1, rule #2 tells us to increase your deductibles to the maximum level that you’re comfortable with.  Raising deductibles is the surest way to reduce your premiums.  For auto and home policies, $1,000 is a good level to set deductibles to.

Health insurance is a little trickier.  If you’re relatively healthy, or if you can’t afford more comprehensive coverage,  and you have to insure yourself without an employer’s help*, you may want to look at high-deductible ‘catastrophic’ insurance.  Be sure to look at both the deductible AND the annual out-of-pocket maximum.  Combine these two to get a true picture of the most you’ll potentially have to pay in one year.  You can get a feel for what policies are out there at ehealthinsurance.com.

* Even if your employer DOES pay part or all of your health insurance premiums, if you’re young &/or healthy, you should take a good look at any high-deductible health-care plans that your employer offers, especially if the plan is HSA-eligible.  Such employer plans often have extra benefits like employer contributions to an HSA on your behalf, or zero premiums that you have to pay.

Rule #3 –  Err on the high side for coverage limits

While you want to be aggressive by keeping deductibles to the highest level you can afford if and when disaster strikes, you want to play it safe when it comes to protecting yourself from a large loss by having high coverage limits.

The logic behind this is simple: insurance is to protect you from BIG losses.  It’s okay to risk a (relatively) small loss of a few thousand dollars in exchange for lower premiums, but it’s NOT okay to potentially wipe out your finances with low coverage limits.

Here are a few ‘standard’ recommended limits to keep yourself safe (tailor these to your own risk profile and net worth.  The more you have to lose, the more you need to protect.)

Car insurance: Liability limits of “100/300/100” are pretty standard, and correspond $100,000 per person for bodily injury (as in paying for the health costs of someone you injure), $300,000 per accident for bodily injury (total injury costs for all the people you injure), and $100,000 per accident for property damage (paying for that other car/fence/house that you ran into.)

Health insurance: If you’re pretty healthy, or can’t afford more comprehensive insurance, have a deductible of at least $1,000 – $2,000, with an annual out-of-pocket maximum of no more than $5,000 or $10,000 per person or family, respectively, or less paying if that amount in the event of a health catastrophe terrifies you.

(Keep in mind that even if you do have to pay, say, $300 out of pocket for some annual trip to the doctor, the amount you save in premiums with a high-deductible plan that doesn’t cover such a visit, versus a more comprehensive (=higher premium) plan that would,  might still make the high-deductible plan a smarter choice.)

Your lifetime maximum benefit should be at least $1 million**.

(** You may not have to worry about lifetime & annual maximums: As part of the Patient Protection and Affordable Care Act, aka ‘Obamacare’, lifetime maximums should be unlimited for all health plans at time of this writing (March 2012), however, your annual coverage maximum may NOT be unlimited until at least 2014.  If this part of Obamacare is repealed in the future, as some politicians & voters would like, then you should adhere to the guidance written above this note.)

Life insurance: I have a whole post on life insurance here, but I’ll give you the quick summary:

Buy a 20 – 30 year TERM life insurance policy with guaranteed level-premiums with a death benefit around 5 – 10 times your family’s expenses (say, $500 K – $1 million for a middle class family of 3 or 4.)  Click here to get a quick quote online.

IMPORTANT: You should almost NEVER buy any kind of ‘cash value’ life insurance which goes by seemingly benign names like ‘whole’ or ‘universal’ life.  These are fee-laden policies that should only be considered by the rich who need more ways to avoid paying taxes on their investments.

Long-term disability insurance:  Your employer should offer some form of long-term disability insurance.  If not, you should probably buy some on your own, as you have about a 2:1 greater chance of being disabled by the age of 60 than dying, and you’ll need income if you’re hurt so badly that you can’t work.  I recommend getting coverage for at least 40%, and preferably at least 60%, of your income.

You can reduce your premiums by lengthening the period of time after you’re disabled but before benefits kick in.  This is called the ‘elimination period’ and should be at least 90 days, and perhaps more (180 days to a whole year, if you have enough savings to make it until then without income).

Home insurance:  Buy ‘Guaranteed Replacement Cost Coverage’ (GRCC), which guarantees to pay whatever it would cost to replace your home at today’s prices, regardless of the stated ‘dwelling limit coverage’ in your policy.

If you can’t get/afford GRCC, buy ‘Extended Replacement Cost Coverage’, which typically will replace up to 120 – 150% of the ‘dwelling coverage limit’ specified in your policy.  This helps to protect you if your ‘dwelling coverage limit’ (the amount that your home is insured for) ends up being lower than your home’s new construction value.

Avoid ‘Replacement Cost Coverage’ (pays up to 100% of the ‘dwelling coverage limit’ to replace your home) and ‘Actual Cash Value’ (which pays only the depreciated value of your home’s construction, which is always less than the replacement cost) policies.

Rule #4 – Don’t buy insurance you don’t need

There are tons of silly insurance policies sold that no one should ever buy. I’ll just mention a few here:

1) Pet insurance: fido’s vet bills should be small enough for you to cover yourself in the event of an emergency.

2) Rental car insurance: use your credit card to book a rental car & you should (check your credit card’s policy) be covered already for collision, AND your regular auto policy should cover you for liability, so tell that pushy Hertz salesperson to take a hike when they try to push any kind of rental car insurance on you.

3) Life insurance for children: unless your child is supporting dependents with their income (maybe you have a young Hollywood star that’s supporting you?), there’s no reason to buy life insurance that covers them.

4) Cash value life insurance: I’ve mentioned this once already under the life insurance rules of thumb section, but it bears repeating: all except the wealthy who need more ways to save on taxes should AVOID cash value life insurance, such as ‘whole’ or ‘universal’, like the plague!

5) Insurance targeted at specific, ‘scary’ risks like so-called ‘dread disease’ policies: The policies you have should already be broad enough to cover most risks (or possibly include ‘riders’ to cover some non-standard risks, for example, earthquake protection for your home).  Don’t let fear-mongering insurers push duplicative & expensive policies for specific risks.

Rule #5 – Keep insurance and investments SEPARATE

This rule boils down to avoiding high-cost, heavily-pushed combined insurance-investment products like cash value life insurance (called ‘whole’, ‘universal’, ‘variable’) and annuities (especially variable ones; fixed ones with good rates may sometimes be appropriate, but I prefer investing in fixed income vehicles like bond funds, instead of locking my money up in an annuity.)

Whenever an insurance agent or commission-driven financial ‘advisor’ starts talking about insurance with ‘investment’ components, run the other way.  These products are typically high-fee, low-flexibility money traps that generate high commissions for the people that sell them (because they’re very profitable for insurance companies.  And guess what?  Those profits come out of your pockets.)

Conclusions

Insurance is a useful risk-reducing tool that should ONLY be used to insure against large losses (never against relatively small ones that you can cover using your income and/or emergency savings.)

So, raise those deductibles and cut your premiums, but make sure you err on the high side of benefit amounts & maximum coverage limits, as well as the length of time that a policy will cover you & your family (in the case of life or disability insurance.)

Stay safe and protect your family & money!

P.S.  If you’re shopping for insurance, or just trying to understand your policy, this link from Investopedia provides some explanation of the various aspects of different types of insurance.